Nov. 6 (Bloomberg) -- KBC Group NV, Belgium's biggest bank and insurer by market value, reported the first loss since its creation in a 1998 merger on writedowns of collateralized debt obligations.

The third-quarter net loss was 906 million euros ($1.16 billion), or 2.65 euros a share, the Brussels-based company said today in a statement. The loss met analysts' estimates and compares with a profit of 639 million euros, or 1.84 euros, a year earlier.

KBC was the last major Belgian bank to seek government support after a downgrade of debt securities by Moody's Investors Service prompted a 1.6 billion-euro pretax writedown on its CDO portfolio. KBC raised 3.5 billion euros selling non- voting securities to the Belgian government on Oct. 27 and scrapped the dividend for 2008 to cushion against credit losses and declines in the value of other investments.

Investors ``are expecting a severe recession to come our way in the coming months if not year,'' Chief Financial Officer Herman Agneessens said in an interview. ``We are fully prepared for it. We have a buffer to withstand it.''

KBC fell 3.6 percent to 33.50 euros in Brussels trading. The shares have declined 65 percent this year, compared with a 55 percent slide in the Bloomberg Europe Banks & Financial Services Index.

Lehman, Washington Mutual

Bank failures in the U.S. and falling stock markets also weighed on the results. KBC said on Oct. 15 it had a 172 million- euro writedown on bonds issued by Lehman Brothers Holdings Inc. and Washington Mutual Inc. In addition, the company said it may lose as much as 277 million euros from a default of the Iceland's Kaupthing Bank Hf, Landsbanki Islands hf and Glitnir Bank hf.

Provisions for bad loans will probably rise in the next quarters, Chief Executive Officer Andre Bergen said in the statement. Loan-loss provisions more than doubled to 130 million euros in the third quarter from 51 million euros a year earlier.

KBC won't incur a ``material'' loss on its 7.7 billion euros of loans in Hungary unless the forint weakens 26 percent from its current value of 262.12 per euro. Such a decline would trigger a loss of 26 million euros after tax, the company said.

More than half of KBC's Hungarian loans are in foreign currencies such as the euro and the Swiss franc. The forint has fallen 7.6 percent against the euro this quarter.

``The update regarding foreign-currency lending and stress testing is reassuring,'' Albert Ploegh, an analyst at ING Wholesale Banking in Amsterdam who recommends buying KBC shares, wrote in a note to clients.

Stock Investments

KBC used 1.25 billion euros of government funding to shore up capital in the insurance unit, depleted by declines in the value of equity investments. A 12 percent slide in the 513- company MSCI Europe Index in the quarter led to a markdown of about 160 million euros on the stock portfolio.

Gross premium income in the insurance division declined 4.9 percent to 922 million euros, missing the 1.07 billion-euro median estimate of seven analysts surveyed, as life-insurance premiums slid 20 percent. Net fees and commissions fell 20 percent to 430 million euros, the lowest in two years.

KBC raised interest payments on savings accounts in Belgium to 4 percent as of July 5 from 1.75 percent, cutting net interest income by 85 million euros in the third quarter. Deposits at the Belgian banking unit rose 11 percent from a year earlier.

The net interest margin, or the difference between what the bank receives on loans and investments and pays on deposits as a percentage of average earning assets, narrowed to 1.57 percent from 1.69 percent a year earlier.

``The margin pressure on savings accounts remains manageable,'' Cor Kluis, an analyst at Rabo Securities in Amsterdam who rates KBC a ``hold,'' wrote in a note to investors.

To contact the reporter on this story: John Martens in Brussels at jmartens1@bloomberg.net

Last Updated: November 6, 2008 11:41 EST